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Investor pitfalls:Steer clear of these traps

Dalia Barsoum, a mortgage professional with Centum Streetwise Mortgage and an investment specialist, outlines the usual traps investors fall into in financing and planning their portfolios.

Video transcript below:

Dalia Barsoum, Lending Advisor, CENTUM Streetwise MortgagesDalia Barsoum: As a lending advisor who caters to real estate investors, who are building a real estate portfolio, we have seen several pitfalls that investors fall to when they finance their portfolios. Some of these pitfalls will hold them back from building their portfolio to the extent they desire and in some cases it will hinder their ability to service the debt on one or more properties.

So the first trap is one of the most common we have seen with real estate investors which is the last lack of upfront planning and goal setting when it comes to investment portfolios. As an investor you want to think about what you want real estate to accomplish for you in terms of cash flow and equity upside, how you are going to make it happen and what strategies you are going to follow to make that a reality and thirdly over what time frame, one, three and five years. Very important to discuss this with your lending advisor so that they can help you in the background, structure financing in a manner that will help you accomplish your goal.

Trap number two is getting pre-approved and this self recommendation is only applicable to residential properties, because commercial is on a case by case basis. When you are pre-approved you will know exactly what’s your lending ceiling and you will negotiate offers with much confidence and you will have an advantage. So it’s very important to go and get pre-approved and that will also help you understand at what point, you are going to go out and raise joint venture money.

So the third trap is not having a relationship with a lending advisor. We have seen investors in the midst of negotiating a real estate deal, default to their most convenient option when it comes to financing, such as a person they know or a lender that they have been dealing with. Nothing wrong with that and the deal typically gets finance, the risk is that the financing could be structured in a way that will restrict the investor’s ability to acquire more property down the road. Therefore it’s really important early on to establish a relationship with the lending advisors that deal with real estate investments and has access to the right products as well as to private fund.

The fourth trap is getting excited about 100% financing. While real estate investment is about leverage and to maximise your returns, it’s important to use leverage and sometimes other people’s money, it is, you have to ask yourself the question, “what risks are you getting yourself into, specially if interest rates go up?” We have seen investors go with 100% financing in a low interest rate environment, but when rates start to hike, they put their cash flow at risk and their ability to service the debt at risk.

Trap Number 5 is not looking at your investment property with a magnifying glass. What we mean by that is, it’s very important to upfront, to have reasonable understanding of what rent you are going to be able to charge, what are the reasonable expenses for your property and have proper reserves. We have seen investors jump into property underestimating their expenses or overestimating the rental income and therefore not being able to service the debts at times or run into a negative cash flow situation/

So with proper planning and having the right team players on your team, you can avoid all of these traps that we spoke as well as others that you may face in your investment career.